Chances are, you've thought about retirement quite a bit over the years, whether you've fantasized about how you'll spend your time or fretted about your 401(k) balance. If you're like most people, though, you may be a little fuzzy about what your retirement will really look like.
At some point, you'll need to bring your retirement into sharper focus. Ideally, that's about 5 (or more) years before you hope to retire, when retirement is close enough to know what you want it to look like, and yet far enough away that there’s still time to hone your strategy to help meet those goals or alter your plans.
"There are still lots of big decisions to think about 5 years out," says Ken Hevert, senior vice president of retirement at Fidelity. Hevert advises clearly defining how you want to spend your time, money, and energy during the next chapter in your life—and trying to enjoy the process.
Begin by asking yourself these 5 key questions:
1. What are your expectations?
"It seems like a simple question," says Hevert. "But we know that more than half of couples have no idea how much they expect to receive in monthly retirement income, and most either don't know or are unsure of what their Social Security payments may be in retirement."
This lack of planning and understanding may affect more than just your happiness in retirement; it could also affect when and how you'll be able to retire. Five years before you plan to retire may be a good time to refine your retirement planning estimates and reprioritize your goals. "You need to do as accurate and realistic a projection as you can," says Hevert.
Where do you plan to live?
If you plan to move, make sure you also consider how that will impact your cost of living, including the cost of health care and your access to it. If you have your eyes on moving to another state, be sure you understand any differences in taxes (e.g., state, income, estate, local, sales, and property taxes) as well as differences in the cost of living. If you plan to stay put, you'll want to consider how your home equity factors into your plans.
What do you want to do?
The early stages of retirement can be an expensive time. Many people overestimate how much they'll be able to work in retirement, and underestimate how much they'll spend. Take a hard, realistic look at both fronts.
How will you pay for health care?
After food, health care is likely to be your second largest expense in retirement. According to the Fidelity Retiree Health Care Cost Estimate,1 an average retired couple age 65 in 2019 may need approximately $285,000 saved (after tax) to cover health care expenses in retirement.
While many preretirees are thinking ahead and factoring health care costs into their retirement savings plan, almost 4 in 10 are not.2 In fact, 48% of preretirees estimated that their individual health care costs in retirement would be less than $100,000—far lower than Fidelity's current estimates.
If you've relied on your employer to pick up most of your health care tab, retirement could be a rude awakening: Only 18% of large companies offer health care benefits to retirees, according to a 2018 employer survey by the Kaiser Family Foundation. Although Medicare kicks in at age 65, you may need to buy supplemental insurance or, at the very least, budget for higher out-of-pocket health care expenses than you had while you were working.
Read Viewpoints on Fidelity.com: How to plan for rising health care costs
2. Will you have enough?
This is the most important question that many preretirees need to answer. According to Fidelity Investments' latest Retirement Savings Assessment (RSA),2 the median baby boomer is on track to meet 86% of estimated retirement expenses: enough to cover the basics, but not sufficient to cover all estimated discretionary expenses.
With 5 years to go, you'll want to run some real numbers, either with help from an advisor or our Fidelity Planning & Guidance Center. If the numbers aren't encouraging, you may need to rethink your plans, step up your savings, or both. The good news: If you're age 50 or older, you may be able to make up for a savings shortfall with additional catch-up contributions to your 401(k) or IRA. If you are age 55 or older, you can also make an additional $1,000 catch-up contribution annually to your health savings account.
Read Viewpoints on Fidelity.com: How much do I need to retire?
"Consider an annual savings goal of at least 15% or more (including any employer match), including 401(k) and other workplace plans, IRAs, and other savings," says Steven Feinschreiber, senior vice president at Fidelity. "But that's only a rough guideline, and assumes continuous savings for 40 years of work and an age-appropriate asset mix."
For baby boomers who are nearing retirement, saving more and adjusting their asset mix has less impact for the simple reason that they have less time for those changes to impact accumulated wealth—though it may still help. For them, postponing retirement is generally the most effective step. Delaying retirement from 65—the average age people planned to retire, according to the RSA study—to their full Social Security retirement age (between 66 and 67, depending on their birth year) may be the best way for most preretirees to boost their retirement savings and increase their retirement income levels. If you delay claiming, you’ll have more time to build your retirement nest egg and a shorter retirement to fund.
3. Are you invested properly?
As you round the bend toward retirement, it’s not a good idea to take on any more investment risk than necessary for your time frame, financial circumstances, and risk tolerance. But remember that this does not mean the answer is always to become more conservative. The consequences of being too conservative can be just as worrisome when you account for inflation and the possibility that you could outlive your savings. That is why it is important to think about an appropriate asset allocation.
Although you can't control market behavior, you can help manage its long-term effect on your portfolio through investment choices and by modifying portfolios so they have an age-appropriate mix. According to the RSA survey, in 2018, 58% of all respondents had allocated their assets in a manner Fidelity considers age appropriate,2 compared to 56% in 2013.
An ideal investment mix will depend on a number of factors, including your age, time horizon, financial situation, and risk tolerance. "Retirement is often the time to take some risks off the table," notes Hevert, "but some people are tempted to become too conservative. But don't forget that your goal is for your retirement savings to last for a 30-plus-year retirement time horizon. This usually means some longer-term growth potential is needed in the portfolio." A financial advisor can help you rebalance your portfolio to get the appropriately diversified asset mix to help you meet your needs.
Read Viewpoints on Fidelity.com: The guide to diversification
4. Where will your retirement income come from?
At the same time you think about shoring up your retirement nest egg, you need to begin thinking about how you'll convert some of these savings into retirement income. For many people, it's helpful to start by grouping potential sources of income into 2 basic buckets: guaranteed income from sources such as Social Security, pensions, and annuities, and variable income from a job, retirement savings, and other sources such as rental real estate.
Next, estimate your retirement expenses and then map out ways to meet essential expenses with guaranteed income sources, and discretionary expenses with nonguaranteed income. If you plan to work a bit during retirement, that may provide a conservative boost to your retirement income. But be cautious here. Survey data shows that many people are not able to work as long as they wanted. Finally, before you rush out to file for your Social Security benefits at age 62, consider the big picture: Generally, the longer you wait, the higher the potential lifetime benefits.
Read Viewpoints on Fidelity.com: Should you take Social Security at 62?
After your review your current investment mix, you may also want to consider shifting a portion of your investment portfolio into income-producing assets, such as bonds or dividend-paying stocks. A guaranteed income annuity3 is another option to consider if you're interested in converting your assets to income. Generally, the older you are when you buy an annuity, the higher the monthly payout, but there may be advantages to purchasing an annuity before you reach retirement age. But these potential moves should still be done within the context of maintaining an appropriate overall asset mix across stocks, bonds, and cash. Remember, your retirement income will likely need to last for 30 years or more, which typically requires some exposure to stocks.
Read Viewpoints on Fidelity.com: Create income that can last a lifetime
5. How does your home factor into your retirement?
Your home is likely one of your most valuables assets. If either downsizing or relocating is in your plans, you may want to start plotting the move now. If moving isn't in the cards, you may still want to think through whether it makes sense to pay down your mortgage faster—thereby saving on interest payments and improving cash flow in retirement.
Read Viewpoints on Fidelity.com: Should you move in retirement?
Alternatively, consider how to use some of your home equity to help finance your retirement. If tapping home equity is only a temporary solution to bridge the gap until you start to draw down your retirement assets or start receiving guaranteed income payments, consider applying for a home equity line of credit while you're still employed and more likely to qualify for the best rates. If home equity factors into your long-term planning, you could also consider a reverse mortgage. But proceed with care and be sure you understand all the associated costs and requirements. Before considering any of these ideas, make sure you consult a tax professional or attorney.
Between your investment portfolio, your home, and your lifestyle plans, there's a lot to cover between now and your retirement. Moreover, you'll likely revisit these topics several times over the next several years, as you well should. The point isn't to have all the answers right away, but to start preparing for the big decisions you'll soon face.